The Office of Budget Responsibility have published their most recent fiscal risks and sustainability report. One of the biggest risks to the UK economy is the cost of pensions. Pensions have been growing much faster than the economy for the last 10 years+.
I wrote about this last month which caused howls of anguish – people are angry that some people are taking out of the system a lot more than they ever put in. They don’t want to accept that the worst culprits are the current generation of pensioners.
Lets start by modelling some fictional couples.
Paying into the System
George and Doris were born in 1930. George left school at 15 and went to work. Doris stayed at home and raised a family. George worked for 45 years on the average wage, retiring in 1990.
George will have paid in £28000 in employees NI. His employers will have paid in £30500, giving total NI contributions for the couple of £58500.
Tommy and Diedre were born in 1945, at the end of WW2
Tommy left school at 15 and started work in 1960. He worked for 45 years on an average wage, retiring in 2005. Diedre stayed at home raising a family.
Tommy will have paid in £37000 in employees NI, and his employer will have paid in £43,000, giving total contributions of £80,000
Fred and Nelly were born in 1953, on the day of the Queens Coronation
Fred left school at 15 and started work in 1968, working for the average wage. He worked for 45 years and retired in 2013. Nelly worked part time for 20 years at 50% of the average wage.
Fred will have paid in £55,300 in employees NI, and his employer will have paid in £63,000. Nelly will have paid in £4150 employees NI, and her employer will have paid in £5330. Their total contributions will be £128,000
Harry and Betty were born in 1965 on the day of Churchill’s death
Harry left school at 15 and started work in 1980, working for the average wage. He worked for 45 years and retired this year. Betty worked full time at the average wage, but took 15 years out of the workplace to raise children
Harry will have paid in £81,800 in NI. Betty will have paid in £54000. Harry’s employer will have paid in £96,700, and Betty’s will have paid in £63,822. Their total contributions will be £296,322
Wayne and Sharon were born in 1980. They left school at 21 and both entered the work place. They will both work until they are 67, 46 years on the average wage, retiring in 2047.
At current rates of NI they will each pay £125,000 employees NI, and their employers will pay £155,000, giving a total of £560,000 paid in.
Taking Out of the System
George and Doris paid in £58,000. They came from a generation that grew up before the NHS and had a much lower life expectancy. George, as an average member of his generation, only lived for 2 years after retiring. Doris lived for 6. Pensions were low and they took out less than they paid in – only £20,800, less than half of what they paid in. This was the financial logic when the welfare state was set up.
Tommy and Diedre were baby boomers. They paid in £80,000. Life expectancy increased rapidly after the creation of the NHS. Tommy lived for 9 years after retirement, Diedre for 14.
They retired in an era when pensions, and other pensioner benefits were more generous, and took out £148,000, significantly more than they paid in.
Fred and Nelly were younger baby boomers. They paid in £128,000. Even though they were born less than a decade after Tommy and Diedre they had a much longer life expectancy. Fred lived for 14 years post retirement, Nelly for 19. They took out £258,000 in pensions and pensioner benefits, nearly double what they put in. They were the generation who benefitted from the triple lock, and increased pensioner benefits.
Harry and Betty are due to retire in a few years. They will have paid in £296,322 when the retire. Life expectancy isn’t increasing anything like as fast as it was for the baby boomers, and in some parts of the UK it is declining. Projecting forward their life expectancy and pension costs they will take out £312,000 in pensions, pretty much exactly what they paid in.
The chances of Wayne and Sharon ever getting back the £0.5m+ they paid in are slim.
How pensions work
There is no state pension fund. No national insurance fund. There is only the Departmental Expenditure Limit (DEL), and Annual Managed Expenditure (AME).
Pensions come from AME, and are technically part of the benefits system. I realise that pensioners resent their pensions being described as benefits, but it is true, and always has been. Pension are paid for our of NI and General Taxation. The majority of the benefits budget goes to pensioners, and the reason why the benefits budget is increasing rapidly is the costs of pensions – the triple lock has cost several times more than was planned due to sharp increases in inflation.
The NI contributions of the current generation of pensioners paid for their parents pensions. The NI contributions of the current tax payers pay for theirs. My kids will pay for mine. That is how it always works. The high taxes that people currently pay fund the triple locked pensions of the baby boomers.
Increased life expectancies, the triple lock and the political power of pensioners meant that generations of OAPs were able to take out of the system huge amounts more than they put in. This is the crisis of the benefits system, not asylum seekers, or people receiving PIP.
As we saw with the Winter Fuel Allowance any attempt to reduce the costs of pensions and pensioner benefits causes a huge political backlash. For most of the last 15 years the boomer generation have set the agenda for the government, who were happy to indulge their whims in return for their votes; austerity, hostile environment, no deal Brexit, Rwanda. Billions frittered away on daft ideas that damaged the economy and diminished our standing in the world. By the last general election the country was in a pitiful state, but when asked to contribute the clear up the mess they created they had a tantrum.
And so the country is left with a pension system that it can no longer fund, but which is politically too dangerous to change.
https://ifs.org.uk/sites/default/files/output_url_files/bn105.pdf
https://obr.uk/docs/dlm_uploads/Fiscal-risks-and-sustainability-report-July-2025.pdf
Wouldn’t the fact that your George and Doris were “born before the NHS” have minimal relevance, unless their ultimate life expectancy was harmed by some disease they caught in childhood? After all, if they were born in 1930 they would have had the NHS for essentially all of their adult lives.
What was perhaps more relevant is that their health as working-age adults would have been poorer for reasons unconnected with the health care system, both environmental (more air pollution in a post-war UK that was still heavily coal-powered) and lifestyle-related (at least one and perhaps both likely smoked, and they likely ate more fatty fried foods and fewer fruit and vegetables than is common today).
All of that is perfectly reasonable, but the difference in life expectancy between those born before 1945 and those born after is massive.
I can well believe that the introduction of the NHS caused a sharp increase in life expectancy at birth, but this would be due to a plunge in infant mortality and would thus not be a factor in making the state pension a greater burden on society. Indeed, falling infant mortality would be a good thing for the national finances, as children who die before reaching working age are a pure loss.
What would really affect the solvency of the pension system is life expectancy from age 60: did that increase sharply in 2005 in the way that life expectancy at birth increased 60 years earlier?
Life expectancy at birth and life expectancy at 60 both increased after the introduction of the NHS. There was a sharp increase in the late 90s due to more cash for the NHS, the smoking ban, and statins. That increase has levelled off, and life expectancy is falling in some areas. I
An important point that I noticed Marios Richards make on Bluesky, is that the improvement in the living standards of pensioners from 1990 (when 40% were living in poverty) to 2010 (when only 13% were living in poverty) has helped push British politics rightwards.
Poor pensioners pre-1990 felt compelled to vote Labour out of fear that the Tories would cut their already-meagre state pensions even further, while pensioners post-2010 have been much better off (in part due to housing wealth and in part due to the political power of the Baby Boomer generation), which has freed them up to vote according to their values (which often now means voting Reform).